Cotton prices headed to a dollar in 2009?

One factor that could bring U.S. cotton acreage back to pre-grain-boom levels – cotton futures prices close to a dollar – could be on the horizon for 2009, according to a cotton analyst speaking at the 2008 Beltwide Cotton Conferences in Nashville.

Texas A&M Extension economist Carl Anderson says that cotton prices could move higher if the United States is needed to fill the gap between foreign consumption and production, which is expected to reach a whopping 19 million bales in 2008-2009. World prices would likely reflect whatever factors are driving U.S. prices domestically.

This makes the U.S. supply and demand situation a very important one for U.S. cotton producers and world consumers of U.S. cotton.

U.S. cotton acreage for 2008 is expected to fall between 9 million and 10 million acres in 2008. At 9.5 million acres, an 850-pound yield would produce 15.3 million bales. A very high yield of 900 pounds would produce 16.2 million bales.

A range of 14 million to 16 million bales “is quite a bit more than we had last year, and is certainly lower production than we had two years ago.”

Anderson also noted that upland cotton planted acreage is changing by region, and this year, almost half of U.S. cotton acreage is expected to be in Texas. “Texas carries so much weight that if we have bad weather, it could change our production by 2 million bales. If we have a bad year in Texas alone, we could get down to 13 million bales. That’s a tight situation.”

Although new crop cotton prices are in a territory they haven’t been in since October, 2003, when prices reached 82.7 cents, “I believe we have to get December, 2008 over 80 cents to do much good.”

Anderson, along with other experts at the Beltwide’s Marketing and Economics Conference, believes that China will start to buy cotton heavily beginning this spring. “We could still get to 16.2 million bales of exports for 2007-2008. But if we don’t, our carryover will be about 8 million bales, which will weigh heavily on prices for old crop.”

Anderson noted that world cotton prices, as measured by the A-Index, are rising as the stocks-to-use ratio in exporting countries is falling. There’s a good relationship there and that’s why I think the market should have good support throughout the world.”

Anderson pegs the deficit between foreign cotton consumption and foreign cotton production in 2008-2009, at 19-million bales. “which is good news for us in the United States. With all foreign production declining where are they going to fill the gap? They’ve just about used up all their excess stocks. So they are going to have to come to us if they need them. We think consumption will hold up pretty good. At worst, it would be flat.”

In the short term, “This market has quite a bit of strength,” Anderson said. “If this market doesn’t wake up, cotton could lose more acreage to soybeans and corn than we’ve already lost. Final decisions on cotton planting are going to have to be made in about six weeks. So if this market is going to buy any acreage, it’s going to have to buy it pretty quick.”

Anderson urges cotton producers to keep on eye on the market “to see if it’s paying attention. It has tremendous resistance on December 2008, at 79 cents. The entire arena between 78 cents and 80 cents is one big obstacle to this market.

“If we bounce off it several times, it may not be as strong a market later on unless we have a short crop. But if the market makes a new run to 80 cents, then you need to think about fixing prices. But don’t hold for 85 cents. That’s as far as I’m going to go with December 2008 futures.

“If this market goes up to 79 cents and bounces off that for 3-5 weeks, then you might think about putting floors in, but don’t put a top in. If we have bad weather in Texas, two million bales less cotton would surely make some difference.”

Use options to lock in prices because they lower your market risk, Anderson says. “But how you use options is important too.”

The future could be even brighter in 2009. “If we run our stocks down by the end of the 2008 crop year, we could easily see 2009 December futures at 90 cents. It could go to 98 cents but don’t get hoggish. Don’t wait for December cotton to get to a dollar a pound.”

Anderson emphasized that there is a great deal of uncertainty in the market, and despite his long experience in analyzing the markets, “sometimes I feel like a freshman, again,” he said.

Anderson’s analysis of new crop futures, “shows we’re not going to be close to getting a counter-cyclical payment for new crop.”

Anderson, along with other analysts at the meeting, is also concerned that a recession or economic slowdown in the United States could be a negative factor for higher prices.